What’s a home worth – Appraisals, market analyses, and price opinions

house valuesWhat’s the value of my home?” is a question that is often asked by many home owners at least once, usually before they decide to refinance or list their home for sale.  Although the question seems straight forward enough, the answer may not be – and can vary depending on whom you ask.

Market Value can have different meanings.  Some may view a home’s value in terms of an asset on a balance sheet, while others may consider a home’s value as a potential sales price.  And although these approaches to value may be similar, there is often significant disparity in their conclusions.

Mortgage lenders consider a home to be an asset, which is the basis for lending you money; as well as the basis for bundling and selling mortgages on Wall Street.  Additionally, a home is often considered an asset or liability when determining the disposition of legal proceedings, such as (but not limited to) probate and divorce.  A real estate appraisal is most likely used in determining market value for these situations.

According to the Appraisal Institute (Pamphlet “Some Commonly Asked Questions About Real Estate Appraisers and Appraisals”; appraisalinstitute.org), “An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience and professional judgment of the appraiser.”  Additionally, Title 16 of the Business Occupations and Professions, Annotated Code of Maryland defines an “appraisal” as a “…means an analysis, conclusion, or opinion about the nature, quality, utility, or value of interests in or aspects of identified real estate” (§ 16-101. Definitions).

Not to be confused with an appraisal, a Comparative Market Analysis (CMA) can assist a home owner with deciding on a listing or sales price.  In fact, § 16-101 differentiates a CMA from an appraisal by stating, “’Appraisal’ does not include an opinion to a potential seller or third party by a person licensed under Title 17 of this article [referring to a real estate broker] about the recommended listing price or recommended purchase price of real estate, provided that the opinion is not referred to as an appraisal.”

If you are asking about the value of your home because you’re planning a home sale, consider consulting with a real estate and a CMA.  Although a thorough and professional CMA is not an appraisal, a CMA is a technical and methodical procedure that is typically limited to a specific neighborhood or subdivision so as to offer a rationale for a probable listing or sales price.  Unlike appraisal methodology, which is uniform; there is no standard approach to preparing a CMA; however, a comprehensive CMA can be technical and systematic, as well as offering a market trends analysis in one, three, and six month segments.

Many lenders have also turned to agent prepared CMA’s to assist in determining potential listing or sales prices for distressed assets (e.g., foreclosures and short sales).  Also known as broker price opinions, these CMA’s provide a market snapshot to assist with such disposition decisions.

The value of your home will vary depending on whom you ask; your neighbor may even have an opinion.  However, if you’re planning a home sale, an experienced agent and their detailed CMA may be your best source of information to decide on a listing price.

by Dan Krell © 2013
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Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  This article was originally published the week of December 16, 2013 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

Shortcomings of the broker price opinion

by Dan Krell © 2010

A broker price opinion (also known as a BPO) is not an appraisal, nor is it a substitute for an appraisal. The BPO is the lender’s way of getting a “snap shot” of the subject market area. A BPO (not unlike a CMA) is an analysis to assist a buyer or seller in deciding a home’s offering, or listing price. BPOs have been used for many years, and for various reasons that range from quality control to making decisions on mortgage portfolios and loss mitigation.

A BPO is not a perfect tool and is limited to the information provided as well as the people involved in the process. The shortcomings that are inherent in the BPO process begin with the lender that orders the BPO and is extended to the BPO company that “farms” the BPO out to real estate agents, as well as to the agent that completes them.

The problem first begins with the lender who is usually not in the same market area as the subject property. Seeking a way to get a snapshot of a home’s “value,” the lender will pay for a broker price opinion. The lender’s employees who order and use the BPO is sometimes mistaken to think that they are getting a report that will say what the home will sell for, when actually the BPO is just an offering of possible listing prices based on area comparables.

The shortcomings of the BPO are extended to the BPO company (third party) that hires the real estate agents to provide the reports. BPO reports are typically completed over the internet these days using electronic forms that can limit the amount of information that is provided. A typical BPO report requires a limited specific number of comps (listing and sold comps), regardless of the availability of neighborhood comps; the report may have to exclude additional available comps while sometimes use comps that are hardly comparable to the subject property. The online forms used to complete BPOs also limit the amount of information that is input; which can limit the actual market data and conditions that is sought from the lender.

Once submitted, the BPO typically undergoes a review for “quality.” BPOs are usually reviewed for procedural standards as well as comp quality. Interestingly, quality reviews are usually conducted by reviewers not familiar with the subject market area; it is quite possible that some quality reviews are not only conducted in another state, but in another country. Ironically, quality and substance is sometimes sacrificed for quantity or a “specific result.” (Past agent complaints, posted on agent bulletin boards, indicate that they realize some of their reports are altered after submission by someone other than themselves).

The ultimate shortcoming of the BPO stems from the real estate agents who complete the BPO. In recent years, with the explosion of short sales and foreclosures, there has been an increase in the need for more agents to complete BPOs. Some agents seek out BPOs because they are under the impression that they will get an REO listing, other agents seek out BPOs because they solely rely on the BPO business as income, while others just take on BPOs to supplement their brokerage income.

Time and care is necessary to complete a quality BPOs. Many real estate agents performing BPOs have little or no training in conducting BPOs; many agents do not have the expertise to provide a CMA to a home owner let alone completing a BPO. What may be more alarming is that some agents boast about the number of BPOs they complete per week (I recall one agent boasting that they complete over 100 per week!).

“Turn’em and burn’em” should not be the motto of anyone in this process. Because quality BPOs are useful and needed, the future of BPOs may rely on local licensing or registration which can ensure competence of those performing BPOs as well as maintaining standards of those who use them.

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

Don’t Blame Broker Price Opinions

by Dan Krell (c) 2009.

The Standard and Poor’s/Case-Shiller Home Price Index for February 2009 (published April 28th) indicated a composite home price decrease of 18.6% as compared to the previous year (standardandpoors.com). The good news is that the current index did not continue the record setting pace like the previous sixteen months’ indices. While local home prices did not fare as well as the Dallas metro area (prices decreased only 4.5% from the previous year), the Washington DC metropolitan area home price decrease of 19.2% was much better than the Phoenix, Las Vegas and San Francisco metro areas (where home prices decreased more than 30% from the previous year).

Certainly, home price indices are just an indicator of the real estate market; and although the factors contributing to market conditions are complex, it does not stop us from trying to understand the causes of the steady decline.

Since the large increase of recent foreclosures and short sales have captured our attention, the loss mitigation process and the use of Broker Price Opinions (BPO) have received some blame for eroding home values. So much so, that one national columnist recently posed the question by portraying the use of BPOs as an easy way for real estate agents to make money in a tight market. Unfortunately, the article appeared to represent the sentiments of real estate appraiser groups and did not accurately portray BPOs.

A BPO is not a substitute for an appraisal. A BPO (like a market analysis) is data provided to assist a buyer or seller in deciding a home’s list, offering, or sales price. Mortgage lenders and servicers have used BPOs for many years. BPOs are used for many reasons that range from quality control to making decisions on mortgage portfolios and loss mitigation.

BPOs have also been used as a due diligence tool to control appraisal quality and investigate property valuation fraud. Additionally, BPOs have been used by the lending industry to evaluate the performance of their mortgage portfolios (mortgages bundled together typically used as financial instruments) for internal and secondary market purposes.

The use of BPOs in loss mitigation is not a recent phenomenon, lenders have used BPOs as one tool in their loss mitigation process for several decades. In order for lenders to obtain the best data for their decisions, they typically do not rely on one BPO; multiple BPOs are usually ordered at any given time as well as over a period of time to provide a snapshot of market trends and control for data variance.

Additionally, it is common for lenders and servicers to compile BPO data throughout the loss mitigation process. BPOs are usually ordered when the home owner initially becomes delinquent on their mortgage payment and continues until the delinquency is resolved (either brought current, short sale or foreclosure). Prior to delivery to the lender, the BPO company conducts a quality assurance review for all BPOs to ensure that the data provided is valid and consistent.

Market forces are complex; to blame eroding home values solely on the use of BPOs in the loss mitigation process is just as silly as blaming a bubble real estate market on artificially inflated appraisals. Although a BPO is not an appraisal and should not be confused as such; BPOs have an established role in the industry.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 4, 2009. Copyright (c) 2009 Dan Krell.

Smile, your home is on candid camera!

Have you seen people in your neighborhood drive up to a home, pull out a camera and take some pictures? You might wonder if they’re casing your neighbor’s home, or if they’re terrorists. Certainly, it may seem disconcerting to have strange people take photos of homes in your quiet neighborhood. Who are these people and why are they taking pictures?

Most likely, these nosey folks are just your neighborhood real estate agents preparing a broker price opinion (bpo). A broker price opinion is a report that a lender will ask for to determine the marketability of a home in which they are the mortgagee (the lender). The report is used to assist the lender to understand market conditions by having the real estate agent provide recent sale and listing comparables for the home. Additionally, the lender asks for photos to note the condition of the home and the neighborhood.

A bpo is not an appraisal and should not be confused with one. An appraisal is provided by a licensed appraiser to ascertain a home’s value. A bpo, on the other hand, is provided by a real estate agent or broker with the intention of assisting buyers or sellers or prospective buyers or sellers in deciding the listing, offering, or sale price of the real property. (There is a controversy within the industry over the use of bpo’s.)

The lender uses the bpo for a number of reasons which include selling mortgages, eliminating private mortgage insurance, and loss mitigation. Although we now have a bad taste for the bundling and selling of mortgages on Wall Street, nevertheless this is how a majority of mortgages are sold. The broker price opinion is often used by investors to place a current market value on the mortgage asset by interpreting the bpo.

If you have asked your lender to reduce or eliminate your private mortgage insurance, there is a good chance your lender used a bpo in their decision process. A lender will look at current market conditions and recent sales to decide if a home has the potential of falling below the 80% loan to value threshold.

In the current market environment, loss mitigation is a more common reason for a bpo. Every lender has a loss mitigation department to determine how much they may lose if the home goes to foreclosure. Believe it or not, your lender may order a bpo if your payment is one week late!

Additionally, the loss mitigation department is the office you would communicate with in order to ask for a short sale on your home. So if you are asking for a short sale, you may see these surreptitious agents driving by and snapping photos. Sometimes, the lender may ask for an interior bpo, and you will have to invite the agent in your home.

So, if you see these folks poking around your neighborhood taking pictures, it is likely to be your local real estate agent; however, to be sure you should ask for their card. In taking their photos and inspecting properties, they should be law abiding (which means they do not peek into windows nor should they trespass). However, the police should be called if you have doubt about their identity, or you feel unsafe.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 1, 2008. Copyright © 2008 Dan Krell.